Two Out of Three Ain’t (Good): Leading Indicators Falter Again

Key Points

  • Although a couple of components had to be estimated courtesy of the government shutdown, the LEI declined in December for the second time in three months.

  • Trend often matters more than level, especially when it comes to leading indicators.

  • Recessions 101: They are not (and have never been) defined as back-to-back quarters of negative real GDP.

Most regular readers know that I keep a close eye on leading economic indicators, especially at possible economic inflection points. There are two popular indexes that track a multitude of individual leading indicators—one published by The Conference Board (TCB) and one published by the Economic Cycle Research Institute (ECRI). Both are shown below.

LEI’s Rollover?

Source: Charles Schwab, FactSet, The Conference Board, as of December 31, 2018.

WLI’s Rollover

Source: Charles Schwab, ECRI (Economic Cycle Research Institute), as of January 18, 2019.

I prefer the Leading Economic Index (LEI) from TCB because of the transparency of its calculation and components. ECRI’s Weekly Leading Index (WLI) methodology is more secretive; although one assumption most economists share is that it likely puts more emphasis on stock prices than TCB’s. That might explain why it has more clearly rolled over from its February 2018 peak.

Government shutdown

When the LEI for December 2018 was released last week it was noted that due to the government shutdown, data for several of its components were not published and had to be estimated by TCB. They included manufacturers’ new orders for consumer goods and materials for November and December, and building permits for December. In addition, TCB has postponed the regularly scheduled annual benchmark revision of the composite indicators until all underlying data are available.